April 28, 2020

Australian Markets Weekly: assessing monetary policy

Easier monetary policy should be helpful in supporting the economy as activity rebounds later this year.

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  • The Reserve Bank has exhausted conventional monetary policy, with the cash rate at a record low of 0.25%, and implemented several unconventional measures, such that the real exchange rate is now down 5.5% from the end of 2019.
  • The lower cash rate would ordinarily boost growth by 0.6pp over the next year and a half, but this has been partly offset by a further fall in the neutral rate (the lower neutral rate mainly reflects a wider spread between lending rates and the cash rate).  Moreover, this stimulus may be partly unwound as the real cash rate rises over the next year or so given actual/expected inflation usually falls in a recession.
  • Unconventional policies to date have seen the Reserve Bank’s balance sheet expand from 9% to 13% of annual GDP, with international research suggesting this could boost growth by 0.8pp. If the fall in the exchange rate is sustained, it could boost growth by a further 0.6pp.
  • This all suggests that easier monetary policy should be helpful in supporting the economy as activity rebounds later this year. That said, the economy is dealing with the largest shock to growth in the post-WW2 period, which brings home the need for the government’s unprecedented fiscal stimulus, which should see the budget deficit reach a peacetime record of 13% of GDP next financial year.

The week ahead – AU Q1 CPI; US and EZ Q1 GDP

  • Australia.  Q1 inflation is released on Wednesday, where NAB is forecasting a slightly above-market 0.3% rise in the CPI, lifting annual inflation to 2.2%. The trimmed mean CPI should rise by 0.4% or 1.7% over the year. That said, stronger inflation will be short lived, where we forecast the headline CPI to fall a sharp 1.9% in Q2 amid falling oil prices and the introduction of free childcare from April.  NZ.   New Zealand is scaling down containment measures a notch to a level 3 lockdown on Tuesday. The week’s data focus is on the ANZ’s business survey update on Thursday, along with its consumer confidence reading for April, due Friday.
  • International.   We expect China’s PMIs to recover further in April with more firms able to open for business. Q1 US GDP on Wednesday should show an annualised contraction of about 4%. Also Wednesday, the market expects no change to policy at the FOMC meeting, which is followed by Fed Chair Powell’s press conference. Friday’s US manufacturing ISM for April is expected to report a big fall to 38. Thursday sees Q1 EZ GDP, which is expected to contract by at least 4% in the quarter. The ECB meets Thursday and the focus is on its assessment of the economy, with no new forecasts or policy announcements expected.

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